10 Pot Stock Bargains… and 10 Companies to Avoid

Matthew Carr By Matthew Carr
Chief Trends Strategist

Beyond the Bong
This is individual research and does not constitute investment advice.

Despite the milestones, historic moments and high-flying optimism, it’s been a tough stretch recently for pot stocks.

The U.S. Marijuana Index is down 8% since April 3.

That’s painful, but not nearly as painful as what’s happening north of the border.

The Canadian Marijuana Index has fallen 15.64% since March 19. That’s almost twice the drop of its U.S. counterpart.

Despite the pullback, Canadian cannabis stocks are up more than 22% in 2019. Meanwhile, U.S. pot stocks have surged 31%.

And the divergence we’ve seen over the past month was perfectly illustrated by Monday’s noteworthy movers…

For example, one of the U.S.’s largest multistate operators, MedMen Enterprises (OTC: MMNFF), reported preliminary third quarter results. Revenue is up 22% from the second quarter to $36.6 million.

And the company’s 10 California dispensaries were the biggest contributor, combining for revenue of $24.9 million.

Margins contracted from 53% to 51%, but the results topped analysts’ expectations and shares of MedMen moved higher.

Canadian licensed producers (LPs), on the other hand, started the week on a more sour note.

Aphria (NYSE: APHA) and OrganiGram Holdings (OTC: OGRMF) both reported before the opening bell yesterday. And to no surprise, investors freaked out over widening losses.

I’ve penned plenty about this before. In fact, I’ve written about it at least once a week this earnings season. Losses were expected because of the ramp-up in production companies put in place to prepare for Canada’s nationwide legalization last October.

Nonetheless, OrganiGram shares slipped more than 7% and Aphria shares tumbled more than 13%.

These declines buckled the entire Canadian cannabis ecosystem yesterday.

So the question now is, even though there’s been a steep pullback in shares, is the sector still overvalued?

To help answer this question, this week my team and I pulled data on price-to-sales (P/S) ratios.

As always, we want to compare companies based on their industry average. Each industry is unique in terms of how much risk investors are willing to take.

We found plenty of value, as well as a number of stocks to be wary of.

Here are the most overvalued cannabis companies ranked by P/S ratio…

Now, the industry’s average P/S ratio is pretty high at 109.

But that’s largely because of the run-up in the shares of Canadian LPs. They’re just starting to bring in real revenue.

Keep in mind, this is the first full quarter of adult-use sales.

We also have biotechs like Zynerba Pharmaceuticals (Nasdaq: ZYNE), GW Pharmaceuticals (Nasdaq: GWPH) and Lexaria Bioscience (OTC: LXRP) on the “overvalued” side.

And there are more established LPs like Emerald Health Therapeutics (OTC: EMHTF) and Cronos Group (Nasdaq: CRON) ranked up there. Plus, James E. Wagner Cultivation (OTC: JWCAF) – which isn’t in the chart – is also above the industry average.

Meanwhile, one of the cannabis stocks I’ve been preaching to avoid this year, Tilray (Nasdaq: TLRY), is in problem territory. Currently, shares have a P/S ratio of 101. And that’s after they tumbled more than 51% from their peak this year.

Also not in the chart but worth noting are Canopy Growth Corp. (NYSE: CGC) – sitting at No. 13 with a P/S ratio of 87 – and Aurora Cannabis (NYSE: ACB) at No. 16 with a ratio of 72.64.

Now let’s turn our attention to the opportunities in the industry.

Here are the most undervalued cannabis stocks…

Historically, we’ve seen CBD companies rank well in terms of value and revenue.

And once again, CBD is well represented.

Isodiol International (OTC: ISOLF) is far and away the cheapest cannabis stock. The CBD maker has a P/S ratio of just 0.40. That’s an attractive ratio even outside of pot stocks.

At No. 5, we have Curaleaf Holdings (OTC: CURLF). The company recently inked a massive CBD distribution deal with CVS Health (NYSE: CVS).

Fellow U.S. CBD producers CV Sciences (OTC: CVSI) and Charlotte’s Web Holdings (OTC: CWBHF) are also in the “undervalued” range, though not in the top 10. CV Sciences’ P/S ratio is 10.74, while the ratio for Charlotte’s Web is 23.74.

We also see packaging company KushCo Holdings (OTC: KSHB) at No. 7. It just reported that revenue jumped 240% to $35.2 million. That was well above the $25.5 million Wall Street expected.

And though they’re not in the top 10, Aphria, CannTrust Holdings (NYSE: CTST) and OrganiGram all have seen recent steep earnings pullbacks and have P/S ratios below 26. That puts them well below the industry average.

Even though cannabis stocks have had a tough time so far in April, investors should stay focused.

The all-important industry holiday, 4/20, is just days away.

And with the recent pullbacks, now is a great time to search for value among the wreckage.

Here’s to high returns,

Matthew

P.S. In case you haven’t heard, Energy & Resources Digest is getting a makeover. We’re updating our brand to better reflect who we are and what we cover. So starting sometime next month, you will see a new design and a name change from Energy & Resources Digest to Profit Trends. Stay tuned for more details!